Case Analysis of Job Fraud in Societe Generale

1 Company profile
Societe Generale is one of the largest commercial banking groups in France.
Headquartered in Paris. It was founded in May, 1864, with the name of "French
General Administration of Commerce and Dual Commerce". Originally a private bank,
it was nationalized in 1946 and 1979. The state controls 93.5% of the bank's capital,
which is then converted into full control.
2 Playback of the case and the financial implications
Societe Generale, which has more than 200 years of outstanding achievements, is
one of the largest banking groups in the world. It plays a leading role in the world's
largest derivative trading market and has always been regarded as one of the banks
with the best risk control in the world. However, on January 24th, 2008, it broke out
the biggest fraud scandal of traders in the financial industry (Beijing UnionPay
Information Consulting Center, 2008). Jerome, a 31-year-old trader. Jerome Kerviel
(hereinafter referred to as JK) bought a large number of European stock index futures
without authorization, which eventually caused the Industrial Bank a loss of 4.9
billion euros (about 7.14 billion US dollars). Lyndon Nelson, head of the Financial
Services Authority (FSA), pointed out that "the Societe Generale incident is a warning
to all enterprises. How to prevent job fraud has become an urgent and important issue
for all enterprises.
Societe Generale, with more than 200 years of brilliant achievements, is one of
the largest banking groups in the world and plays a key role in the world's largest
derivatives trading market. It has long been recognized as one of the best risk control
banks in the world. However, on January 24th, 2008, it revealed the biggest job fraud
of financial sector traders in history (Beijing UnionPay Credit Information Consulting
Center, 2008). Jérôme, a 31-year-old trader. Jerome Kerviel (UK) bought many
European stock index futures without permission, which eventually led to the loss of
4.9 billion euros (about 7.14 billion US dollars) for AG. After the labor fraud incident
at Societe Generale, Lyndon Nelson, director of the Financial Services Authority
(FSA), pointed out that "the Societe Generale incident is a warning to all enterprises.
How to prevent workplace fraud has become a top priority for all enterprises.
3 Actual impact
As JK opened tens of billions of euros in stock index futures, after the
management of Industrial Bank discovered it, from January 21 to 23, Societe
Generale of France sold for three consecutive days and took a series of market
hedging measures to clear its position. The reputation of Societe Generale was
seriously affected by this incident. Some mainstream newspapers in France attacked
Societe Generale. After Societe Generale announced this fact, Fitch Ratings lowered
its credit rating from AA to AA-. The shares of Societe Generale in Euronext were
suspended for this incident. After the stock resumed trading, the stock price dropped
sharply, once falling by 4.4 euros to 74.68 euros/share. Citigroup once downgraded
the shares of Societe Generale from "buy" to "sell", from the previous $130/share to
$65/share. On January 28th, the shares of Societe Generale fell by 2.82 euros, or 3.8%,
to close at 71.05 euros.
4 Social impact
After January 15th, 2008, the U.S. stock market fell sharply after the outbreak of
the fraud case in French commercial banks, and the gains of Dow Jones index,
Standard & Poor's 500 index and Nasdaq composite index in 2007 were all wiped out.
Due to the market downturn caused by the subprime mortgage crisis, the economic
recession and the decline of consumer confidence, the Federal Reserve has become an
ant on a hot pot ",and then the" Industrial Bank Incident "happened, which made the
Federal Reserve even more overwhelmed. On January 21st, the European stock
market fell by 7%. Obviously, the Fed was shocked. The next day, because of the
"deteriorating financial market situation", the Fed cut interest rates urgently to ease
the liquidity crisis of the market and the possible financial turmoil.
5 Preventive measures
Based on the analysis of the causes of fraud in this case, combined with relevant
information and literature, the author thinks that the key to prevent fraud at work is to
improve internal control and internal audit.
a) In the process of establishing and improving internal control, the enterprise
should also emphasize that the construction of internal control must allow all
employees of the enterprise to really participate. To improve internal control in case
of fraud, not only the front office, functional units and support units should have clear
responsibilities and cooperate with each other, but also all staff should explain their
responsibilities and formally acknowledge their responsibilities. Of course, the
construction of internal control should still emphasize the main role of the board of
directors and management in establishing internal control and preventing workplace
fraud.
b) In order to improve internal audit, enterprises should implement the principle
of "prevention is more important than research", and effectively strengthen risk
management and internal control of the company, which is the premise to solve the
fraud problem at work. The internal audit institutions of enterprises should strictly
abide by the internal audit standards, emphasize that internal audit should adhere to
the working system of regular audit and special audit coordination, and timely carry
out special audits in case of special and abnormal situations in the activities and
management of daily audit tasks of enterprises. Internal audit institutions should pay
special attention to all kinds of abnormal signals in the business process in their daily
work. On the other hand, in the process of establishing internal control and internal
audit, the company should establish clear reference standards and conditions for some
abnormal phenomena and signals to determine which ones are abnormal.
6 Analysis of case investigation results
a)JK's "superb" operation technique. JK, aged 31, joined Societe Generale in
JK2000. After five years' work in the auxiliary support department of supervising
trading, he moved to the trading department and engaged in arbitrage trading.
However, JK made this short-term transaction into a long-term transaction by
adopting the method of real buying and fake selling. According to the bank survey,
since the late 2006, JK started to buy a portfolio A, but did not sell it at the same time.
In order to cover up the traces of building positions and avoid the related risk control,
he made a virtual sale at the same time, and put fake operation data in portfolio B,
which made this portfolio look like a hedge with the portfolio A he bought. The
forgery methods were varied.
b) There are huge hidden dangers in the internal control of Societe Generale. The
reason for JK's successful job fraud is not only "attributed" to its "superb" operation,
but also the serious lack of internal control related to Societe Generale. Through
investigation, it was found that collusion with colleagues provided JK with an
opportunity to evade internal control, and about 15% of the false transactions JK
adopted were completed by his trading assistants. It is the collusion between the
trading assistant and JK that provides an opportunity to circumvent internal control.
At the same time, under the background of corporate culture based on honesty, traders
often balance their business performance to get higher allowances, which also creates
conditions for JK to evade internal control.
c) There are defects in the support and control functions of functional
departments and auxiliary support departments. On the whole, the internal control
runs according to the prescribed procedures, but these internal controls cannot
effectively detect fraud, lacking some key internal controls that can detect job fraud.
The support and control functions of departments like OPER, ACFI and RISQ are
flawed, so JK fraud cannot be found. This mainly shows that in the internal control
procedure of Societe Generale, there is a lack of horizontal internal control function
among departments, and there is no specific regulation on the responsibilities of
internal control among horizontal departments. Abnormal signals found by various
departments cannot be effectively summarized and properly handled.
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